The travel industry has been in a post-pandemic boom, but the wind may be going out of its sails. Online travel agent (OTA) Expedia (NASDAQ:EXPE) surprised the market by announcing it was firing 1,500 employees, or 9% of its workforce, because of sagging demand. The cuts will hit its bottom line by $80 million to $100 million.
It’s not alone. Booking Holdings (NASDAQ:BKNG) also said to expect a slower first-quarter result as well as weaker full-year financials. Sabre (NASDAQ:SABR) pretty much said the same thing.
Airline fares are still falling as consumers prioritize their travel plans, but high costs and repeated mechanical failures at Boeing (NYSE:BA) could dampen demand further. With doors popping off planes, landing gear breaking off and reports the plane manufacturer is failing numerous safety checks, travelers just might decide to choose some other form of transportation. The “staycation” could even make a comeback.
If demand is slowing so much, investors may want to use caution when buying travel stocks. Here are three companies to scrutinize in the wake of Expedia’s layoffs.
Carnival (CCL)
The biggest cruise ship operator Carnival (NYSE:CCL, NYSE:CUK) has failed to recover its former heights before the pandemic hit. The government forced the cruise industry to remain drydocked longer than just about any other industry. It cost the cruise liner owners billions of dollars that they have yet to make up. Norwegian Cruise Lines (NYSE:NCLH) finds itself in much the same situation. Shares of both companies remain between 65% and 70% below the levels they traded at pre-pandemic.
Only Royal Caribbean (NYSE:RCL) is running full steam ahead. RCL stock trades about 15% above where it was before the global health crisis. RCL stock is also just below its all-time high hit right before the crash.
Make no mistake, Carnival has rebounded sharply from the depths it sunk to during the pandemic. CCL stock is up 76% over the past year. But the cruise line operator still faces rough seas. Although it paid down large swaths of debt it acquired during the health crisis, it still has $28.5 billion in long-term debt on its balance sheet. There is only $2.4 billion in cash, with another $5 billion in liquidity available to it.
Carnival’s saving grace is that cruise demand remains relatively strong. Booking volumes are at record highs, and customer deposits of $6.4 billion are a record. The cruise ship owner will not sink, but spiking inflation won’t help. If a recession hits, CCL stock could get hit by a rogue wave.
United Airlines (UAL)
Like much of the cruise industry, United Airlines (NASDAQ:UAL) is doing much better than it was at the onset of the pandemic but has still failed to gain much altitude. UAL stock remains about 43% below pre-COVID levels. Boeing’s woes are not going to help.
The industry has been constrained by shortages of planes and pilots and a lack of capacity to meet post-pandemic demand. However, airlines were able to record profits that might soon end if travel demand weakens further. Slowing plane deliveries from Boeing will cause airlines to cut costs, meaning hiring plans will get put on hold. United posted a $600 million GAAP net profit last quarter, a 28% decline from last year. It also has nearly $30 billion in long-term debt and operating leases. High interest rates, elevated jet fuel prices and high labor costs will all weigh on the airline.
Warren Buffett famously critiqued the industry as a unique business that destroys capital.
“But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.”
He broke his vow to not invest in airlines a few years ago, including United, only to quickly retreat and sell off his entire stake. The structural inadequacies of the industry don’t make it a good one to invest in, at least if you’re a buy-and-hold investor.
Airbnb (ABNB)
One travel stock showing surprising strength amid a declining market is short-term vacation rental outfit Airbnb (NASDAQ:ABNB). The stock is up 22% year-to-date and over 38% higher than it was a year ago.
Although growth is slowing, it is still increasing at double-digit rates. Revenue grew 17% last year when adjusted for currency fluctuations, while profits more than doubled to almost $5 billion. Gross booking values were up 16% to $73 billion, and nights and experiences booked grew 14% to over 448 million.
By serving both hosts and travelers it benefits by offering the widest possible selection of options. Its global presence attracts the largest audience to meet any budget or need. It means Airbnb doesn’t have to be affected by a worldwide slowdown in travel demand, as guests can choose getaways closer to home at price points they can afford.
It’s like why ABNB stock is only about 20% below the all-time high it hit in early 2021. Management expects business to continue growing this year. Because Airbnb has proven adept at generating free cash flow, it has sufficient cushion to cover any temporary downturns.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.